An initial public offering (IPO) is when a business grows up and is let loose into the world, much like a teenager on his 18th birthday. The only difference is that there are more lawyers and headaches involved with an IPO than with a child; though in my case, an IPO would have involved far less lawyers/headaches. But I digress. An IPO allows access to more money from public investment and is often a method for angel investors, venture capitalists, and start-up staff to cash out some or all of their equity in a growing business.
Business Metrics to Qualify for an IPO
The IPO process, much like coming of age, involves answering increasingly invasive and personal questions to make sure you can hack it out there in the real world. Legal requirements allow, and regulatory agencies will inevitably insist on a detailed audit of a newly-minted business. This is like when parents check your report card and talk about how they got As walking uphill both ways barefoot, so why can’t you?
Jokes aside, a business has to show predictable and reliable growth without being too dependent on a specific customer, vendor, supplier, or favorable regulatory circumstance. Zoom in on market and competitor analysis, existing and likely future debt burden, asset base, and so on. The goal is to persuade anyone interested that the business be a viable and logically coherent investment with a competitive ROI. IPOs don’t want to mint lottery tickets in the guise of stock shares.
Changing Management Priorities
With a private business, growth doesn’t have to follow quarterly or annual targets. Business management can decide on a course of action purely on its own financial merits with no regard for opinions outside of the small circle of private equity investors. This flexibility is, in part, what enables a new business to grab opportunities and sales that more established industry leaders may miss. Well, the rebellious phase ends when a business is publicly traded.
Analyst forecasts, shareholder activism and lawsuits, endless regulatory expenses and expectations all matter. Bad news or missed quarterly growth targets can quickly snowball into the stock diving straight into penny stock purgatory. Investors will be spooked, vendors and clients will look at the business side-eyed, debt will weigh down earnings, and your parents will give you that stern “I told you so” look that you hate, and they know you hate, and they do it on purpose because that’s payback for when you threw a fit and said Grandma’s cooking smells like socks.
Businesses are ready for an IPO when they can meet the scrutiny and reasonably predictable growth expectations. The IPO process is formulated with an eye to the public’s trust in corporations and the government to interact in a constructive and socially beneficial manner for consumers, employees, and a vast constellation of individual and institutional investors.